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Islamic Development Bank president on Shari’a-compliant banking | ASHARQ AL-AWSAT English Archive 2005 -2017
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resident of the Islamic Development Bank Dr. Ahmed Mohamed Ali Al-Madani arrives for the Friends of Yemen ministerial meeting in London, Britain, 07 March 2013. (EPA/ANDY RAIN)

President of the Islamic Development Bank Dr. Ahmed Mohamed Ali Al-Madani arrives for the Friends of Yemen ministerial meeting in London, Britain, 07 March 2013. (EPA/ANDY RAIN)

President of the Islamic Development Bank Dr. Ahmed Mohamed Ali Al-Madani arrives for the Friends of Yemen ministerial meeting in London, UK, on March 7, 2013. (EPA/ANDY RAIN)

Riyadh, Asharq Al-Awsat—In an exclusive interview with Asharq Al-Awsat, Dr. Ahmad Mohamed Ali Al-Madani, president of the Islamic Development Bank (IDB), emphasized the need to draw up collective Islamic strategies to create a joint Islamic market, noting that the bank is currently working to improve its organizational structure and financial and service operations.

Dr. Al-Madani emphasized that the bank is developing and growing, saying that he expects the bank’s operations in the current year to increase by almost 15%, adding that IDB grew stronger in the wake of the global financial crisis.

Dr. Ahmad Mohamed Ali Al-Madani is the first president of IDB and has held this position since 1975.

The following interview has been edited for length:

Asharq Al-Awsat: What is the size of IDB’s assets to date? What growth rate did you achieve last year? And what are your expectations for growth in the coming year?

Dr. Ahmad Mohamed Ali Al-Madani: The bank’s total assets [investments and assets] are estimated at USD 17 billion and its operating assets at USD 10 billion. The funds’ growth rate reached 13% in 2012, for a total of USD 7.9 billion in funds that included project financing and business operations. This year, the bank’s operations are expected to grow by almost 15%.

IDB decided to increase its total annual operations by 30% annually from 2009 to 2011 in order to help its member-states overcome the effects of the global financial crisis. Following this, the bank’s funds returned to their previous growth rates, estimated at 15%, starting in 2013. In addition to those amounts, the obligations to investment and export credit insurance policies are estimated at almost USD 17 billion through the end of 2012.

Q: What effect did the global crisis have on IDB’s performance? What profits did the bank achieve last year and what profits is it expected to achieve this year?

The global financial crisis caused the bank’s financial activity in member states to increase, as the lack of global liquidity and the global recession that resulted from the crisis forced many of the member states to approach the bank more than any other time in the past, to request assistance in financing their development projects. Moreover, the annual growth rate for the bank’s financial operations doubled from 15% annually in 2009 to 30% annually through the end of 2011, effectively increasing the bank’s activities by 90% over the three years.

Even though the bank is an international development organization whose financial transactions comply with the rulings of Islamic Shari’a law, it still achieved annual profits at a rate of almost 5%. Moreover, the bank does not distribute these profits; rather, it uses them to fund its different activities and operations, and to support its general reserves. The bank’s profits reached almost USD 175 million in 2012 and are expected to increase and grow at rates commensurate to those of previous years.

Q: How much money has IDB offered to support socio-economic development?

The bank’s funds for the benefit of member states grew to almost USD 90 billion from its foundation to November 2012, and these funds have been allocated to all of the socio-economic development sectors in its member states. Due to the high degree of agreement and understanding over how to direct these resources and order our priorities for development, these funds have benefitted our member states in many ways, including [raising their credit rating as determined by] international rating organizations. Thanks to the generous support the bank has received from its member states, it successfully maintained the highest international credit rating, AAA, with a stable outlook for the eleventh year in a row from the three principle international ratings agencies: Standard & Poor’s, Moody’s, and Fitch.

Q: What is your view of the activities of Islamic banks in general? Do they harmonize and interact with each other?

The Islamic banking services industry is growing quickly worldwide, and this confirms that financing has been integrated with actual activity. There are 300 Islamic banks worldwide to date: there are approximately 30 Islamic banks and windows [Islamic departments in conventional banks] on the European continent, for instance. This is likely to increase because Islamic financial services are not just for Muslim societies, but rather for all segments of society. The founding principles for this industry are shared by all of the Abrahamic religions. There has also been a significant development regarding the creation of Islamic banking infrastructure, which represents a strong springboard for Islamic banking.

In my opinion, now is the time to activate this industry and achieve a quantum leap in the quality and credibility of its products and services and meet the world’s aspirations for creative, productive, and safe banking at the same time.

Q: What is your opinion of the International Islamic Financial Market (IIFM)?

The IIFM was founded in April 2002 in Bahrain in order to address the absence of Islamic investment vehicles and the liquidity problem of Islamic banks, particularly as most of their activities focus on commercial goods transactions. Even though this comprises the majority of their activities, we must note that there are many investment vehicles available to Islamic banks, like the [Shari’a-compliant bonds] mudarabah sukuk and ijara sukuk that have recently become more prevalent. One of the most important things that this market seeks to do is to create new financial instruments that contribute to the formation of a secondary market, as well as new investment opportunities that attract the investments of Islamic states in the traditional markets and those investors wishing to do business with these financial instruments according to Islamic Shari’a law.

Q: What are the mechanisms for rating Islamic banks internationally?

The International Islamic Rating Agency (IIRA) that was founded in 2004 in Bahrain is the first agency specializing in rating Islamic banks and financial organizations. These organizations depend on traditional international financial institutions, except that this agency has now helped them to develop their business and advertise their securities in the international market—especially with foreign banks—once they obtained an international rating from this agency. This agency also provides the required transparency of Islamic financial organizations’ inner workings and grants them the ability to evaluate the size of the risks that they face.

Q: What stance do Islamic banks take on the government and fighting corruption?

Islamic banking by nature is committed to the principles of Islamic Shari’a law, not only in financial contracts and transactions but also in all forms of interaction with shareholders, investors and depositors. As such, a government’s regulation of Islamic banks will be more stringent than it would be with traditional banks. Despite this, we cannot forget that the Islamic banks’ employees are human, and so prone to error. The opportunities for correction, discipline and redress, however, are greater in Islamic banks. Moreover, the Islamic banking principle of always being attached to assets reduces corruption and provides government with a ready-made framework.

Q: What are IDB’s methods for joint financing with international organizations that do not operate according to Shari’a law?

There are several ways to interact with international and commercial financial organizations in the realm of joint financing. In principle, Islamic contracts can offer guarantees that are not any less than those of interest-bearing loans. In fact, financing through ijara offers the financier a better guarantee than mortgaging assets, because the assets are registered in the name of the financier and not the borrower. In this case, there is nothing that prevents traditional banks from using Islamic contracts.

In Istisna’a contracts (specialized contracts for large construction or manufacturing projects), for instance, it is possible to obtain a letter of guarantee from Islamic banks in which the financier is not exposed to unacceptable implementation dangers. In other cases, the project is divided into components or segments in which the transaction takes places directly between banks and the project’s owner—in this case, there is no overlap between Islamic bank financing and traditional financing.

Q: What is the role of IDB in the establishment of a joint Islamic market?

The need to raise the levels of bilateral trade in Islamic states is a strategic goal and a necessity imposed by global economic developments. In light of the climate of economic globalization and its resulting emerging international economic entities and interests, priority is given to whatever offers the most suitable environment for economic growth and adaptation to international changes. Generally speaking, the terms of trade between the member states of the Organization of Islamic Cooperation are 18%, and have not yet reached our lofty ambitions.

The joint Islamic market remains a dream and a hope because it would facilitate the process of adapting to the globalizing economy; meet the commercial, production, and technical challenges posed by globalization; support economic groupings competing for international markets; and achieve socioeconomic development in Islamic states. Moreover, the proposed joint Islamic market would also integrate each state’s financial, natural, and human resources; facilitate handling the size of each individual state’s internal markets; strengthen these states’ bargaining power and competitive ability in international economic relations; increase productivity; and reduce the severity of their dependence on developed countries.